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House Prices will continue to rise & construction of more not the answer

2015 annual house price growth forecast revised up from 4.7% in June to 5.6% this month.Average price of a UK property to stand at a record high of £263,000 this year.Prices to rise by a further 3.5% in 2016 and 4.2% in 2017.

The lack of properties coming onto the market is one of the reasons behind the upward revision to the forecast.

The price gap between a terraced house and a purpose-built flat in London has nearly quadrupled from £46,000 in 2000 to £176,000 in 2014.

New predictions from leading economic forecaster Cebr – the Centre for Economics and Business Research – show that house prices are set to increase by more than previously expected in 2015. Cebr now expects the price of the average home in the UK to rise by 5.6% – up from its June forecast of 4.7% growth.

The lack of properties coming onto the market and therefore drying up supply is one of the reasons behind the upward revision to the forecast. Cebr believes there are several key drivers of this:

Households expect property values to keep rising. Individuals want to sell at the top of the market, but at the moment few anticipate a downturn in prices.

Demographic changes – the UK’s ageing population. Homeownership has risen dramatically among older households since 1981, but has collapsed among younger households. With retired individuals less likely to move home, this is curbing the number of individuals putting property up for sale.

A substantial increase in the cost of moving up the property ladder, especially in London. Moving up the property ladder has historically been a key reason to sell a home – but for many this has become infeasible. See Figure 2.

Low levels of housebuilding are reducing the number of new builds being put up for sale in the UK.

The high cost of moving home, with stamp duty costs curbing house moves. This is particularly the case at the prime end of the property market which saw a substantial increase in stamp duty rates in last December’s Autumn Statement.

As a low level of housebuilding is only one of the causes behind the issue, exclusively addressing this matter – as the new Housing and Planning Bill largely does – will not go far enough in controlling rising home prices. Reconsidering various other housing market features is also necessary. For example, the UK’s population is getting older and with retired individuals less likely to move home, added incentives are necessary to encourage ‘rightsizing’. For example, a stamp duty exemption or reduction for those looking to ‘rightsize’ would encourage pensioners to put larger properties on the market.

Historically, one of the most common reasons to switch homes was to move up the property ladder, for example from a small flat to a family-friendly house. The price difference between a terraced house and a purpose-built flat has skyrocketed in some regions, most notably London. In 2000, this price difference stood at £46,000, but has nearly quadrupled to £176,000 in 2014.

Nina Skero, Cebr Economist and main author of the report, said, “a reduction in the number of properties being put on the market has placed further upward pressure on house prices in some parts of the UK. This is a result of low levels of housebuilding, but also other factors such as an ageing population and the rising cost of moving up the property ladder.

“The price gap between a first-time home and a larger family home has skyrocketed in some regions, such as London, curbing activity in the housing market. For many, the rungs of the property ladder are moving further apart, making it impossible to upsize”.

Figure 1: Average UK house price – annual % change

Table 1: Average UK house price – £ and annual % change

Figure 2: Price gap between a terraced house and a purpose-built flat in London and the South East, £